Yesterday following the trading statement released by Lavendon, I decided to make a fairly modest purchase within my trading account. My rationale for the purchase is laid out below:
The shares have had a rotten run over the past four to five months despite a fairly decent but marginally boring trading update in July and a fair if unexciting set of interim figures delivered on 28th August 15. A couple of firms in the equipment hire industry, HSS & Speedy Hire (SDY) have had miserable times over the period I mention but thatâ€™s to be expected as they have issued profits warnings and no such warning has been given by LVD. Maybe the lack of enthusiasm for LVD has to some extend been coloured by HSS and Speedy but a couple of other companies in the equipment hire business have been ticking over nicely, VP (VP.) and Ashtead (AHT) have been ticking over within reasonable share price limits over the period from 1/6/15:
Share price movement since 1/6/15:
LVD -32% No profit warning
HSS -73% Two profits warnings
SDY -55% Two profits warnings
AHT -11% No profits warning
VP. +7% No profits warning
Maybe this suggests that LVD has been a touch unfairly viewed since the start of June following the shaking of the sector by serial profits warnings from SDY and HSS. With this in mind I viewed the trading statement from LVD on 17/11/15 with particular interest.
So how do the numbers stack up with Lavendon and what do they look like in relation to HSS, SDY, AHT & VP.: details in the following table which uses data from Sharepad, Stockopedia and Sharelockholmes:
The Lavendon trading statement issues on 17/11/2015 was fairly upbeat and I assume much better than many expected:
"The Group's trading performance in the first nine months of the year has improved across our markets, driving growth in revenues, profitability and margins. The Board remains confident of delivering on its profit expectations for 2015, and with the delivery of the accelerated fleet investment now almost complete, we are well positioned to respond to market opportunities as we move into 2016."
All in all my view is that Lavendon has probably fallen in share price due to perception rather than actual facts in terms of the financial numbers or company performance
I also like the fact they Lavendon management are very aware of the importance of ROCE and included the comment:
In summary, the growth in overall Group revenues year to date and continued operational improvements have driven further progress in the Group's profitability and margins. The Group's ROCE has improved and remains firmly above the Group's weighted average cost of capital, albeit with the rate of year on year progress being tempered by the previously announced increased fleet investment of Â£20 million in the final months of this year.
In terms of my expectation or target, letâ€™s say a gradual improvement or rerating of the PE to around 10 would give an appreciation of 20-25% in the SP so I will set a target of 170 for review and at the same time hopefully enjoy a decent well covered yield of 3.7%. At the same time I am mindful that the Speedy Hire have rallied over 20% in the past 7 trading days.
On the downside I will set a stop loss at 115p.
As ever, this is not in any way a recommendation but simply the sharing of my reasoning for making the purchase and my reasoning does not always guarantee me success.
I have been in Norcros for getting on for three years now; continually adding by reinvesting dividends and also making a further couple of purchases over this time. As a result NXR had just about become the largest single holding in my portfolio and to that extent I have to admit I was hovering over the Investigate site at 07:00 this morning. My expectation was for more dreary dialogue from a boring company that pays a reasonable dividend and to my estimation has a decent but steady future.
Well it was a nice surprise to see a very positive narrative from Norcros. Note: usually they have that ability of making Steve Davis the snooker player, appear a real hell raiser in comparison. I do like boring stocks but in previous years this lot have taken the biscuit especially in the way they have portrayed announcements; it’ been like looking out of the window on a fine day and declaring “at some time it’s going to rain”. So all in all today’s interims made very pleasant reading:
Revenue up +9.3% which is + 12.0% in constant currency terms
Underlying operating profit up + 34%
Profit before tax up +11%
Underlying operating cash flow up +15%
Diluted EPS up +46%
Interim Dividend up +19% to 2.2p
Note there is an accompanying and expected increase in debt due to the Croydex acquisition which IMO isa really decent acquisition for Norcros.
Martin Towers, Chairman, commented:
"I am pleased to announce a strong set of results for the six months ended 30 September 2015. Not only has the Group continued to make excellent progress in its existing businesses, but it has continued to advance towards its strategic targets with the acquisition of Croydex at the end of June 2015.
With our strong brands, leading market positions and continued self-help initiatives focused on market share gain the Group is well positioned to make further progress. Given the strong first half performance and momentum within our businesses, the Board now expects the Group to achieve underlying operating profit marginally ahead of market expectations for the year to 31 March 2016."
As you can see there is a very healthy increase in interim dividend up 19% and hopefully such excitement can be carried forward to the finals; let’s wait and see.
Although the valuation seems way out of step to me, possibly because the company has just not been loved much by the market and also I guess the market has had concerns about the pension deficit which thankfully seems to be reducing.
The excellent Stockopedia gives a PE(f) of 7.7, yield 3.6% and also gives a very good Stock Rank of 95. All of this adds up to some degree of optimism but this is Norcros and it’s a slow boring plod. I remain optimistic but won’t break into any type of excited dancing just yet!
For anybody interested, Paul Scott who is also a big follower of NXR gives his usual high quality analysis in his Small Cap value Report on Stockopedia.
Overall; I am happy to continue to hold.
How is your portfolio doing? Well, that’s an interesting question and I suppose it to a large extent depends on what an individual is expecting to achieve in term of return.
If we look at a base zero risk, well almost zero risk, an option we could put our money in a bank or building society with little interest return that is steadily eroded by tax if outside of a tax wrapper, cash ISA for example. Also within a tax wrapper or without that enemy at the gate called inflation continually eroding the true worth of our capital. The risk is low and you probably get to sleep very well at night. For those with a need for a little extra spice, there is the premium bonds option that delivers a tad over 1% for the average punter and can be just about ok for 40% rate tax payers. You also have the chance of winning a million £ but you probably in reality have a greater chance of living to be 110 or Michelle Keegan asking you out to dinner; stop dreaming, it ain’t going to happen!
So we investors are always looking to beat the simple safe return and after all we want something extra back for our increased risk. For example, an income portfolio holder may want basic bank/BS return plus let’s say 3% and be comfortable if on average they achieve 4-5% return with hopefully some acceptance of risk to capital. Of course, there are many variations on such a theme and each satisfies the goal needs of an individual balanced against lifestyle risk.
Personally for a good number of years I used to have a target of simply beating the FTSE or similar based on total return. That’s all well and good, but one gets a rather hollow feeling congratulating oneself when you have beaten such an index by let’s say 3% in a falling market i.e. “I have lost money, but I tell you what, it could have been much worse”. These days I like to think that the objective of my investments is to actually make my pot of dosh grow; well if not every year at least averaged over say three years.
I could simply play nice and easy and aim to beat the FTSE all share total return (ASX.TR) and, to be honest, that’s my first base camp up the mountain. Now thinking about it as I have tools at my disposal such as Sharescope/Sharepad, Stockopedia and Sharelockholmes, the odds are that I should be capable of sieving or whittling away the couple of thousand stocks on the LSE and producing some nuggets with a fighting chance of beating the ASX.TR. After all, this index contains the gems, the nuggets and all of the dross. As you can see I am totally setting myself up to take a fall, silly me but that’s life! If I regularly can’t beat such an index then should I pack up, invest in an index tracker or two and go fishing or do something else that amuses me?
However, let’s make it a little harder on ourselves and why not? Let’s try to climb up that mountain a fair bit higher than the base camp and measure our performance against much tougher opposition. A chap who I have a great deal of time for is Terry Smith a guy who put his career in danger when he wrote the book accounting for growth: Terry Smith now runs Fundsmith. Fundsmith is a rather special investment vehicle under Terry’s stewardship it seeks to invest in a very limited number of companies that have a high ROCE, have something of a moat, good certainty of growth and are resistant to change. The companies involved are big and household names: Domino’s, Imperial Tobacco, Unilever, eBay, Reckitt Benckiser to name a few. If you invested £10,000 in the fund at inception on 1/11/2010 then that £10,000 would at the time of writing be worth £22,000. This compares to £13,300 invested in the FTSE 100 TR (I don’t have a figure for ASX.TR going back to 1/10/2010). So, Terry Smith, that’s impressive, well done. If I can’t beat Terry then again should I simply pack up and let him look after my dosh? Interesting one that and to be perfectly honest the good Terry Smith does manage 10% of my wealth in Fundsmith Equity T Acc. Now although I am happy with what Terry is doing for me I want to beat his performance, so we now have two targets:
The FTSE All Share TR/ FTSE 100 TR
Fundsmith Equity T Acc.
Now that is tough but let’s be really a bit tougher and move further up the investment mountain challenge and compare performance against the splendid Marlborough Special Situations UT and the brilliant Henderson Smaller Companies IT.
So without whittling on forever, just how do all these compare if we use the start date as 1/11/2010, the start date for Fundsmith, and invest £10,000 in each of the four vehicles:
FTSE 100 TR £10,000 becomes £13,300
Fundsmith T Acc: £ 10,000 becomes £22,000
Marlborough Special Situations £10,000 becomes £22,000 (yes same as Fundsmith)
Henderson Smaller Companies £10,000 becomes £24,500
Now that all looks interesting and again I ask the question “if I can beat Marlborough or Henderson, then why not let them look after my dosh”? Well being honest once again, I do let them look after about 4% of my capital.
However, let’s get back to the bigger picture and look at the last 10 years. You know the time that encompassed the great global financial melt-down, the banking crisis. Incidentally, I was spending some time on the Greek Island of Lesbos as the melt-down was unfolding; I thought what do we have here RBS at absolute bargain price, I will have some more of that: well that’s another story!
How does the 10-year picture look for the FTSE 100 TR, Marlborough Special Situations UT and Henderson Smaller companies IT? Well here we are what would £10,000 invested in each on 01/11/2005 be worth today right through the banking crisis warts and all:
FTSE 100 TR: £16,900
I can’t give figures for Fundsmith as they were not about 10 years ago.
In summary in order to beat very high-quality investment vehicles: the likes of Fundsmith, Marlborpugh Special Situations. Henderson Smaller Companies; we need to make a return of over 13-14% over the long term and that’s taking into account another dreadful slump such as the banking crisis. Outside of crisis time i.e. the last five years where we have had eurozone crisis, oil price collapse, and generally business as usual our target return should be in the area of over 17% to 19% in my opinion just to make all the hard work worthwhile. If you can’t beat these guys who after all have a splendid sustained track record, then why bother to invest yourself with your own preferred approach which includes lot’s of hard work and I have to say anxiety, pain, elation and hopefully fun. As it happens they collectively look after about 14% of my portfolio and with the other 86% my target is to do better but it is really not that easy.
The measures I use to give me a view on how I am actually doing are thus my performance against:
FTSE All Share TR: epic : ASX.TR
Fundsmith Equity T Acc: epic: FUEQUI: manager Terry Smith
Marlborough Special Situations: epic: FMCIAL: manager Giles Hargraves
Henderson Smaller Companies IT: epic: HSL: manager Neil Hermon
Overall to beat this lot it’s not an easy target but it does focus the mind and hopefully bring added discipline to ones investment decisions. Each of the three UT/ITs above are truly class acts run by very highly respected managers. It is certainly a lot tougher than the soft measure of simply aiming to beat the FTSE or FTSE ASX.TR
I hope you found this article a little thought provoking; happy investing!
I added a base position in Sprue Aegis today. The company issued it’s half year figures in mid September and the price has drifted down a little since then by about 4% since that time.
What I like about the business.
Well it’s a business partly driven by legislative requirements in a number of European countries; smoke alarms and carbon monoxide alarms. Looking at the report and presentation it is clear that this year’s figures have been given a non-reoccurring boost by the legislative requirement in France. However stripping that back, it still looks like there is an attractive business moving into 2016.
Things I specifically like:
No debt and cash position of £29m (attractive against a market cap of £144m)
Good cash flow
Price to FCF 7.0
Piotroski F-Score of 7
Current Ratio 2.0
Operating Margin 14-16%
Very attractive Stockopedia stock rank score of 95, a fact which gives me some degree of reassurance with my decision to make an addition to my portfolio.
Note the above figures are from Stockopedia
In terms of the narrative looking forward:
Sprue still has a reasonable order book for France extending into early H1 2016 which provides good visibility of H2 2015 revenue. Germany's 10 year replacement market is about to recommence and two additional states with around 10m homes will require smoke alarms to be fitted by the end of 2017 which is expected to provide further significant growth opportunities in 2016 and beyond.
The implementation of full scale production of the SONA range of products before 31 December 2015 is expected to provide significant sales growth opportunities for UK Trade in 2016 based on the positive customer feedback received to date.
We are pleased that the Nano-905 is now being fitted into finished carbon monoxide detectors offering enhanced performance in 2016.
Given the adverse impact of foreign exchange rates against Sterling on sales and on gross margin compared to H1 2014, the Group is reviewing customer selling prices.
The Board reconfirms that the Company will continue to pursue its progressive dividend policy. Subject to strict hurdle criteria, the Board will seek to identify potential acquisition opportunities to strengthen the Group's strategic and market position and drive long term shareholder value.
Subject to no significant net adverse foreign exchange rate movements between Sterling and each of the Euro and the US Dollar, the Group is on track to deliver full year results in line with market expectations.
Note: as ever, this is just a log of my thoughts for making a purchase of a stock it is in no way a recommendation or tip please see disclaimer page.
Welcome to my Blog Page - I hope you find my whittling on to be of some interest. I am a private investor who is happy to share thoughts on the market and individual stocks. Please remember that I am definitely not offering tips or investment advice.